George Ralph - bobsguide Contributing Blogger.
In December 2014, the draft of MiFID II technical standards was published, leaving several technological implications for the business operations of banks and capital markets institutions. The purpose of the regulation, in addition to its predecessor, MiFID, is to protect investors, and to improve market integrity by enhancing the transparency of trading. By arming investors with more information, the regulations hope to allow investors to make more informed decisions.
MiFID II covers seven main areas, these being:
• Market structures
• OTC Derivatives and commodities
• Authorisation and organisational requirements
• Third country access
• Restrictions and position limits
• Investor protection and provision of investment services
The list of firms affected by MiFID II is also comprehensive and includes investment firms, credit institutions, portfolio managers, broker-dealers, stock brokers, corporate finance companies, commodity firms, market operators, central counter-parties and data service providers.
Far Reaching Technological Implications
The technological implications of MiFID II impact everything from a firm’s infrastructure to their recording requirements and customer reporting methods. One of the major protections that MiFID II will introduce, with its overarching emphasis on improving investor protection, is a set of far more stringent requirements in terms of communication, disclosure and transparency. The regulations will mandate that ﬁrms record all telephone and electronic communications that relate to client orders. There is even an informed view that this will be extended to include face-to face conversations. And while some individual European marketplaces already have regulations covering this area, the MiFID II directive goes further, including more organisations, individuals and communications than ever before.
With MiFID II, all ﬁrms will have to take all reasonable steps to record relevant telephone conversations, electronic communications and face to face meetings, which relate to actual or possible transactions, both for clients and on the ﬁrm’s own account. The records must demonstrate any terms of any orders placed and will be used to detect any market abuse. The records will need to be kept for at least 5 years, sometimes 7 years or the duration of the relationship with the client, depending on member state discretion.
After much debate, in early 2016, the EU Commission announced that the deadline for MiFID II, originally set for January 2017, had been postponed by a year to January 2018.
The delay is the result of concern in four core areas of the directive: reference data, transaction reporting, transparency parameters, and position reporting. In addition, the European Commission feels that the European Securities and Markets Authority would be not able to adequately complete the compliance process by the original deadline, based on the sheer volume and complexity of data that must be collected.
The sheer scale of the legislation and its associated regulations mean that there will be a huge work plan involved for all the ﬁrms covered if they are to be sure that, when MiFID II comes into force in 2017, they are all fully able to comply with its requirements. In addition, this round of legislation covers more types of companies and individuals than had been the case for previous ﬁnancial trading rules.
Despite the year postponement to the compliance deadlines, there are still several steps firms must take in order to ensure that their technological infrastructure complies with the new standards. The recent delay to MiFID II only highlights the immense amount of work that firms face in order to prepare their IT systems for the new regulation. Firms should still operate against the original timeline due to the sheer volume of work associated with storing and recording this information.
Call Recording and Data Retention Requirements
Recent research has shown that the majority of investment managers believe that MiFID II will have the greatest impact of all the upcoming European regulations over the next two years, the key challenge being the scale and scope of changes that will have to be made to IT systems in order to accommodate these increased reporting and recording requirements. In addition to storing the data, firms must also find ways to report quickly on these transactions against multiple file types. Digitalizing all of the data presented in multiple file types will be one of the most challenging obstacles for firms.
Five Steps to Get Started
For firms that are just beginning to evaluate where they stand with the new regulations, we suggest they undertake a simple five step process. To start, firms should first understand the actual scope of work that must be done in order to meet requirements. Once this has been achieved, they should then identify their data retention requirements and the weak links in their current communications infrastructure, decide how they will store and retrieve the data, and finally, if necessary, select a trusted partner to help identify and amend any compliance gaps.
Not Just a Compliance Exercise
While many may view MiFID II simply as a cumbersome compliance exercise and another way for the government to add layers of regulatory control to the market, there are actually several strategic implications. The regulation could actually provide increased market opportunities for firms that adhere to the standards and get their infrastructure in line correctly from the start. Firms that do not comply will ultimately lose revenue, both in the form of fines and investor security.
By George Ralph, Managing Director, RFA.
Read more from bobsguide contributing blogger George Ralph here:
Addressing the implications of MiFID II
Regulation: What’s in Store for the Alternative Investment Sector in 2016